Payment structure fundamentals — cash, earn-outs, seller notes.

Every deal breaks into four components. Cash at close is the only one with zero risk; the others trade certainty for headline upside. The sophisticated seller models all four through the Net Wire lens — what the bank account actually shows on the morning after closing.

§ 01 · The Total Consideration equationNet Wire is the only number that matters.

Total Price = Cash at Close + Seller Note + Earn-Out + Rollover Equity (where applicable). The Net Wire calculation strips this down: start with the Headline Price, subtract existing business debt (bank loans, equipment financing), subtract the escrow holdback (typically 10–15%, held 12–18 months for indemnification), subtract taxes (federal, state, self-employment — approximately 25% effective rate depending on structure), and subtract the earnout discount (30–50% probability adjustment, since roughly half of earnouts fully pay).

The seller note adds back future cash, not Day 1 cash. On a $3M headline deal, the seller's actual wire at close commonly lands near $1.6M. That gap is not a trick — it is the structural reality that makes Phase 4 negotiation matter so much.

§ 02 · Cash at close — the king70–90% target, zero risk.

Cash at close is wired on Day 1. Zero counterparty risk, zero performance risk, zero timing risk. In a strong market, target 70–90% of total price as cash. Buyers asking for 50% or less cash should trigger immediate skepticism — they are pushing risk back to the seller without proportional reward.

The Certainty Play. Savvy sellers often accept a slightly lower total price for a higher percentage of cash upfront. A $2.8M deal at 85% cash ($2.38M net) consistently outperforms a $3.2M deal at 60% cash ($1.92M net) on a risk-adjusted basis. The 8–10× market band per the readiness model holds when cash dominates the structure; the same headline multiple loaded with earn-out probability quickly compresses on a risk-adjusted basis.

§ 03 · Earn-outs — the performance gamble50% collection baseline.

An earn-out bridges the gap between the seller's valuation and the buyer's willingness to pay today. Typical structure: contingent payment based on revenue, retention, or EBITDA targets over 1–3 years post-closing.

Collection reality. Industry data suggests approximately 50% of earnouts fully pay; one-third miss targets entirely. Discount earn-out value by 30–50% when calculating true deal value. Accept earn-outs when client retention confidence is high (above 95%), metrics are clearly defined and hard to manipulate, and revenue-based (not EBITDA-based, which buyers can manipulate via corporate overhead allocation).

Critical metric choice. Revenue earn-outs are seller-friendly — harder to manipulate. EBITDA earn-outs are buyer-friendly — too many ways to add expenses and depress the metric. If EBITDA is unavoidable, demand Pro Forma Adjusted EBITDA with Shadow Accounting — credit for revenue referred to the buyer's other divisions even if booked elsewhere.

Separation from employment. If the earn-out explicitly says "earn-out forfeits if you resign," the buyer has a kill switch. Recent case law holds that earn-outs decoupled from employment avoid IRS recharacterization as ordinary income. Demand the earn-out is triggered by business performance, not continued employment.

§ 04 · Seller notes — the vendor take-backSecure, priced, capped.

The seller acts as the bank, issuing a promissory note for 10–20% of the purchase price, paid over 3–5 years with interest. Buyers request seller notes to make deal math work with bank financing — but the security profile and rate determine whether the structure is acceptable.

Security requirements (non-negotiable). Stock Pledge Agreement — the note is secured by agency equity. UCC-1 Financing Statement — establishes legal claim on agency assets; if the buyer defaults, the seller can foreclose. Never accept an unsecured note; in liquidation, unsecured creditors typically recover ~20 cents on the dollar.

Interest rate guidance. With Prime rates at 7.5–8.5%, seller notes must yield 7–9% minimum. Accepting 4–6% subsidizes the buyer's acquisition. Higher interest compensates for illiquidity risk and subordination to senior debt.

The Subordination Trap. Seller notes are almost always subordinated to the bank's senior debt. If the bank has a covenant violation (DSCR drops below 1.25×), the bank can force payment blockage — freezing seller note payments. Demand a cap on payment blockage (maximum 180 days) in the subordination agreement.

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